Drugstores in Korea are struggling to stay afloat as they are losing money due to cutthroat competition in the industry

2013-09-17 17:01

Drugstores struggle to beat competition

By Park Ji-won
Drugstores are struggling to stay afloat as they are losing money due to cutthroat competition in the industry. Recently, restrictions were placed on retail companies, making it difficult to open a new store. The regulations also limit operating hours. To avoid such restrictions, retail conglomerates CJ, GS and Kolon have invested in drugstores. As a result, the number of drugstores in Korea has exploded. Some market insiders expect the industry will reach 500 billion won this year and could reach 700 billion won by 2014.
While the estimates are encouraging, increasing competition is making it tough for some drugstores to stay afloat. CJ Olive Young, which runs the highest number of drugstores, 348, in the country, is losing money. It posted an operating loss of 3.45 billion in H1 this year, marking the company’s first loss in recent years. The company posted a 6.94 billion won profit in 2011, followed by an 8 billion won profit in 2012, according to data released by Eugene Investment & Securities.
“The loss is due to rising management costs connected with opening new stores,” analyst Kim Mi-yeon said.
GS Watsons, an affiliate of GS Retail, is also struggling financially. The company currently owns 88 stores and plans to open 12 more stores by the end of the year, according to officials.
While the firm plans to expand, it recorded a net loss of 2.68 billion won in 2012, according to the latest data from the Financial Supervisory Service.
W-Store, an affiliate of Kolon Wellcare, has 109 stores, making it the second largest drugstore in Korea. 
In the past three years other retailers have opened drugstores. Nongshim opened Pandora, E-mart opened Boons and Lotte Shopping opened Lohps.
“The rising competition in the industry could be suicidal for each firm,” said a market insider.
“The unusually high amount of discounts used to attract customers also raises concerns about margins for each firm, as well as the initial cost of setting up stores hurting markets financial stability,” the market insider added.
Meanwhile, Caffe Bene, a franchise chain in Korea, got out of the drugstore business at the beginning of the year after months of financial struggle. The firm had launched a drugstore called December 24 in August 2012.
“In my opinion, even though drugstores are struggling to capture market share, it could be the last business opportunity free of government regulation in the retail industry,” Shinhan Investment Analyst Park Hee-jin said.
“The drugstore industry stands on a boundary line. It could be introduced as a convenience store, which means it’s subject to government regulations, or it might not. If it makes its own identity as a drugstore, I expect the stores will become more like a Japanese drugstore, where drugs and daily necessities are sold,” Park said.